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Ace Automotive Group, a publicly held manufacturer of cars

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Ace Automotive Group, a publicly held manufacturer of cars [#permalink] New post 03 Dec 2013, 14:35
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Question Stats:

63% (02:33) correct 38% (02:02) wrong based on 103 sessions
Ace Automotive Group, a publicly held manufacturer of cars and light trucks, plans to move the production of engines for its automobiles to Mexico from plants in Indiana. However, Ace Automotive will still assemble its cars and trucks in the United States. The president of Ace Automotive announced to Wall Street analysts that this move will save the company $20 million per year even after accounting for the increased transportation costs needed to get the Mexican produced engines to Ace's assembly plants versus current engine transportation costs.

The statements above, if true, best support which of the following assertions?

(A) Ace Automotive Group's stock price will rise.
(B) Ace Automotive will have to deal with pickets and protests when it closes its engine production facilities in Indiana.
(C) Ace Automotive would save more than $20 million per year from this move if engine transportation charges from Mexico equaled the old transportation charges from Indiana.
(D) Ace Automotive Group's assembly plants are, on average, closer to the old Indiana engine plants than they are to the new Mexican engine plants.
(E) Ace plans to spend less than $20 million on increased transportation costs.

OE to follow
[Reveal] Spoiler: OA

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Re: Ace Automotive Group, a publicly held manufacturer of cars [#permalink] New post 04 Dec 2013, 11:40
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avohden wrote:
Ace Automotive Group, a publicly held manufacturer of cars and light trucks, plans to move the production of engines for its automobiles to Mexico from plants in Indiana. However, Ace Automotive will still assemble its cars and trucks in the United States. The president of Ace Automotive announced to Wall Street analysts that this move will save the company $20 million per year even after accounting for the increased transportation costs needed to get the Mexican produced engines to Ace's assembly plants versus current engine transportation costs.

The statements above, if true, best support which of the following assertions?

Dear avohden,
I'm happy to help. :-)

This is a great GMAT CR problem, because the argument is packed with all kinds of fascinating distractors. This is an inference question: for more on this question type, see:
http://magoosh.com/gmat/2013/gmat-criti ... inference/

(A) Ace Automotive Group's stock price will rise.
Who knows? He made an announcement to Wall Street, so maybe the stocks will go up, but predicting stock movement is always a tricky business, and the argument offers no further proof of this. The whole stock thing is a distractor. This is incorrect.

(B) Ace Automotive will have to deal with pickets and protests when it closes its engine production facilities in Indiana.
It's funny. In real life, it wouldn't be at all surprising if this happened --- this is very typical for this sort of situation. Nevertheless, the argument says absolutely nothing about disgruntled workers, so we have no grounds for drawing this conclusion. This is incorrect.

(C) Ace Automotive would save more than $20 million per year from this move if engine transportation charges from Mexico equaled the old transportation charges from Indiana.
Here, we have to read very carefully. The prompt says, "..this move will save the company $20 million per year even after accounting for the increased transportation costs..." This means, the move saved them even more --- say, $30 million/yr --- but they will have to pay for the increased transportation cost --- say, $10 million/yr --- so that the net savings is $20 million/yr. Gross is always greater than net. If we cut costs in some way, here cutting transportation costs, then the overall saving would have to be higher. This is definitely true, based on the passage.

(D) Ace Automotive Group's assembly plants are, on average, closer to the old Indiana engine plants than they are to the new Mexican engine plants.
We know transportation costs will be higher, but we don't know about distance. Some transportation costs are related to business, but some are related to tariffs, border crossing feeds, etc. It may be the the Mexican plants are much closer but because of crossing an international boundary, it cost more to ship from there. We can draw any conclusions. This answer choice is incorrect.

(E) Ace plans to spend less than $20 million on increased transportation costs.
We don't know. In the example I gave above, transportation costs were only about $10 million/yr. Suppose, for the sake of argument, Ace will save $80 million/yr in this move, but the increased transportation costs are $60 million/yr, then the net savings will still be $20 million/yr, even though the increased transportation costs are more.

The only valid answer is (C), the OA.

Does all this make sense?
Mike :-)
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Magoosh Test Prep

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Re: Ace Automotive Group, a publicly held manufacturer of cars [#permalink] New post 05 Dec 2013, 11:36
Official Explanation

Answer C - In the stimulus, we learn that Ace is moving its production of engines to Mexico, that car and truck assembly will still occur in the United States, that the company will save $20 million from the move after increased transportation charges, and that it costs more to transport engines from the new plants than it did to transport them from the old plants.If the company will save $20 million per year after the difference in transportation costs is considered, then the company must be saving more than that if the difference in transportation costs is ignored. Thus, choice (C) is correct.

None of the other answer choices have to be correct. Choices (A) and (B) may seem likely, but they do not have to be true. It could be true that profits at Ace will be negatively affected by some other factor (perhaps consumers will stop buying Ace cars when they hear the news), driving the stock price down. Also, Ace could be redeploying all old employees of the engine plant to new roles, obviating any protests. Remember that you are looking for the answer choice that must be true – not an answer choice that might be true or even a choice that is likely to be true.

Choice (D) may be tempting since we know that transportation costs are higher from the Mexican plants. However, this choice does not have to be true – it could be that there is some sort of surcharge for crossing a border that affects pricing. Similarly it could be true that gasoline or other transportation inputs are more expensive in Mexico.

Choice (E) does not have any support in the passage. We are not given a break down of savings versus increased costs, so we cannot know if this statement is true.

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Re: Ace Automotive Group, a publicly held manufacturer of cars   [#permalink] 05 Dec 2013, 11:36
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